New IRS Cost-basis Regulations for Investments

The Emergency Economic Stabilization Act of 2008 included new provisions requiring that all financial institutions the report adjusted cost basis (in addition to gross proceeds) of covered securities and whether the related gain or loss is long-term or short-term beginning with the 2011 tax year.  These new IRS regulations are designed to help taxpayers accurately report gains and losses on investments in covered securities. 

 Transactions involving non-covered securities will continue to be reported as they have in the past, meaning that only gross proceeds (no detailed cost basis)will be reported to the IRS on the sales of these securities. It will still be the investor’s responsibility to report the proper cost basis on non-covered securities.

Covered securities are any securities that are purchased or acquired on or after the legislation effective dates.  Non-covered securities are those purchased or acquired before the effective dates.

Different securities will become covered in different years:

·         Equities.  Equity securities, investments in common stock for example,  are covered securities if they are purchased or acquired on or after Jan. 1, 2011.

·         Mutual funds and dividend reinvestment plan (DRIP) shares. These types of investments are covered if they are purchased or acquired on or after Jan. 1, 2012.

·         Other specified securities, including fixed income and options. Investments in this category will be covered if purchased or acquired on or after Jan. 1, 2013.

Tax Lot Relief Methods

To help you manage the tax consequences of your trading activities, different and new “tax lot relief methods” available. A tax lot relief method is a way of computing the realized gain or loss for an asset sold in a taxable transaction.  It determines which lot of a security as well as its associated cost basis and holding period are used in computing the gain or loss.

          Some of the more common tax lot relief methods include:

·         First In First Out

·         Last In First Out

·         Highest In First Out

·         Lowest Cost First Out

·         Highest Cost Short Term

·         Highest Cost Long Term

·         Lowest Cost Long Term

·         Lowest Cost Short Term

·         Minimum Loss Minimum Gain

If you have invested in equity securities since January 1, 2011 then I suggest that you visit with your tax and investment advisors to determine the best tax lot relief method to use when you compute the gain or loss on investing activities for 2011.